It's been a rough couple of weeks.
The Nasdaq once again hit the 13,500 line last night, after hearing a hawkish Fed conference from Chairman Powell, which is exactly what we predicted would happen on Monday, when I said:
We were at 15,200 on the Nasdaq Thursday morning and our long-predicted correction target of 15,000 was a certainty but now we're "living on a prayer" that 600 points below 15,000 (14,400) is an overshoot of the rapid correction and not the first leg of the run to 13,500 – where we began Q2 of last year.
13,200 is actually the 20% correction from 16,500 but the key line for the Nasdaq is 15,000 and 16,500 was 10% up from there and 13,500 is 10% down – that's what the above chart is measuring, We will, on the whole, be LUCKY if the Nasdaq settles into a range around 15,000 but, in truth, it's likely we overshot the proper range by a mile and 13,500 may be the top of a proper range that centers around 12,000 – which would be a reasonable valuation for the index.
When you are in a slide like this, you need to consider what is going to change the sentiment and, this week, we have a Fed Meeting on Wednesday but what is the Fed going to say that will help? They have already said they were looking to tighten so reversing would be a sign of weakness and they already said not until March, so doing nothing won't help either. I imagine they'll say they will take market conditions into account along with Labor and Inflation and that might calm things down a little, but will it reverse the slide?
We have, in fact, tested the 13,700 line on Monday and, as of last night, it looked like we were going to break below as we raced back to 13,900 but, miraculously, we had a 350-point turnaround since 2am on ZERO volume – so everything looks fine again at the open – as if Powell didn't actually say anything to spook the markets. Of course, we have our Q4 GDP Report at 8:30 and our Leading Economorons are still expecting it to be up around 5.6% – so we'll see if Omicron causes a disappointment that sends us flying down again.
8:30 Update: GDP came in at 6.9% – a huge beat in the first estimate of Q4. Of course the GDP Deflator, which measures the changes in prices for all Goods and Services, went up from 6% to 7% so things got 16.66% more expensive and that accounts for the higher GDP number – not an actual ecconomy that is producing more goods and servies. However, selling the same amount of goods and services for more money is what Corporate America is all about – so enjoy your rapidly-declining lifestyle!
Speaking of selling less for more, Durable Goods are a huge miss at -0.9%, down from 3.2% in the November report. I guess Omicron and supply bottlenecks are to blame and those are going to be "transitory" – according to the same guy who has been telling us inflation would be "transitory" for the past two years.
Last night, we had misses from CACI, DRE, EW, MEOH, MKSI, PLXS, XM and SLG plus guide-downs from AVI, CLS, CCI, HXL, INTC, LRCX, LC, SIMO and TER as pretty much anyone working with chips sees trouble ahead in Q1. This morning, so far, Misses from FLWS, ADS, IP, KEX, MCD, MUR, SHW, TXT and VLY but, since last night, we have had good reports from (just naming biggies): AMP, CCI, INTC (even though they guided down), LVS (don't get excited – the lost less than expected), LC, LEVI, RJF, SLM, STX, TSLA, URI, VRTX, WHR (surprising), XLNX, ALK, BX, CNX, CMCSA, DOW, EXP, HCA, JBLU (lost less than expected), MMC, NOC, BPOP, ROK, LUV (making money!), STM, TROW, TSCO, VLO (of course) and XEL.
So plenty of good reports but not enough of a ratio to justify a return to record highs – we'll have to see where the week settles out and we're still looking for 14,700 on the Nasdaq (strong bounce) – but that's pretty far away now (14,320). These are the bounces we are looking for against a predicted 20% correction so if ANY of the indexes are still in this zone – it's not a good time to get bullish:
- Dow 36,000 to 28,800 would be a 7,200-point drop with 1,440 bounces to 30,240 (weak) and 31,680 (strong). We were below our predicted 33,120 mid-point at yesterday's lows.
- S&P 4,800 is 20% above 4,000 and that makes it an 800-point drop with 160-point bounces so 4,160 (weak) and 4,320 (strong) is where we are this morning (again).
- Nasdaq is using 13,500 as the base and we bottomed yesterday at 13,706. 14,100 is the weak bounce and 14,700 is strong.
- Russell 1,600, would be about an 800-point drop with 160-point bounces to 1,780 (weak) and 1,960 (strong).
This is a slight improvement from Tuesday, with 14,100 on the Nasdaq going but we're still on the cusp with the S&P & the Russell and the Nasaq is way below 14,700 and 1,960 on the Russell (1,976) could turn red very quickly and it would be tragic if we went into the weekend with more red than we started the week with. As long as this chart is in play (not all green), then those projected bottoms are very much in play for February.
Inflation makes all the data tricky to analyze. For example, MCD reported sales 7.5% better than last year but, when you dig into it, prices are up 6% from last year so the actual sales of products are only up 1.5% from last year's lockdowns and, this quarter, MCD cut store hours by 10% but, even with the savings on wages (and less service to the consumers) they still had a miss – and MCD is down 2.5% this morning.
Of course, MCD is trading at 26x earnings so they are overdue for a correction but, to get to a more normal (for them) 18% would require a 30% drop in price all the way back to $175. That would be 637 Dow points just from MCD! This is why we're still being cautious – valuations are still well above historic highs and there's no real indication that the companies are going to be able to grow into them over the next few years.
Powell's comments have sent the Dollar flying up to 97 this morning, which is where we expected it to top off and, if that's correct, we should see a falling Dollar support the markets this morning (they often ditch the Dollar to mask large amounts of index-selling). If so, that will be great for Gold (/GC), which is testing $1,800 this morning so that's a nice, long line to play in the Futures, with tight stops below – as will be Silver (/SI) if it gets over the $23 line.
Sadly, we can't short Oil (/CL) this morning as the higher Dollar can boost it further. Oil is at $88.50 and we shorted them at $87.50 yesterday and did well during our Live Trading Webinar – picking up over $1,000 per contract but today is not as safe for that bet.
Be careful out there!
